Economist Eugene Fama once reportedly said, "Your money is like a bar of soap – the more you handle it, the less you'll have". This is a great quote, and since it has been repeated by the legendary investor Warren Buffett, we can argue that it applies as much to an ASX stock portfolio as it does to our personal finances.
The share market is an interesting and unique aspect of investing in stocks. Investing in other assets, whether they be term deposits, real estate, or gold bullion, is arguably far easier because there is not a huge, liquid market that is open five days a week and constantly reminds us that we can buy or sell our investments.
To both our benefit and detriment, that happens to be the case with investing in an ASX share portfolio.
The open market is a great thing in many ways. It ensures that we can buy and sell shares without friction. It gives us fast and accurate pricing quotes, low transactional costs and brings investors of all stripes under one roof.
However, although a liquid stock market offers these benefits and more, it also enables some intrinsic psychological flaws in humans that can harm many investors.
The stock market discourages long-term investing and incentivises short-term trading. When prices move around all the time, it can elicit the feeling that we have to 'do something' to take advantage of it.
Some traders make money in this way. But most don't.
As Warren Buffett has also said in the past, "the market is there to serve you, not to guide you".
That brings us back to that bar of soap.
Soaping up your ASX stock portfolio
In my opinion, the best way to make money in your ASX stock portfolio is by finding quality companies that have permanent pricing power in their markets and thus can earn an ever-growing rate of return on the goods or services they sell. The best companies can do this over many years and thus harness the power of compound interest to grow exponentially.
If you own those companies' shares, your stake in these businesses should also grow proportionally. So, the first step of successful investing should be finding these companies, and the second should be buying shares of said companies so you can add them to your ASX stock portfolio at a reasonable price.
If you follow these steps correctly, there is no step three.
But if you invest at step three by deciding that you need to opportunistically sell shares before a market correction, for example, and buy them back at a better price, well… you're handling the soap. Timing the market correctly is almost impossible. You might get it right once or twice, but chances are you'll eventually make a mistake and lose money.
Put another way, 'the more you handle it, the less you'll have'.
Warren Buffett's late and great right-hand man, Charlie Munger, once said that the first rule of compounding is "never interrupt it unnecessarily". This is arguably another way of saying, 'Don't handle the soap'.
These investing legends tell us that we should dip our toes into the stock market as little as possible. And when we do, we should do so carefully and dispassionately. These are wise words for anyone with an ASX stock portfolio to consider today.
